In-Demand Parts: Price Rules

Airlines can save significantly by mining the parts aftermarket, and the avenues that beget those savings just keep getting wider.

The demand for particular parts is pegged to their purpose. Those perpetually in high demand are essential Code 1 parts—ones that if unserviceable keep an aircraft from pushing back, says John Avery, AJ Walter Aviation's director of supply chain solutions. In somewhat lesser demand are essential Code 2s, which, if unserviceable, will not prevent flight dispatch, within certain limitations. Avery says Code 1s and 2s comprise “around half” of the company's business.

“Avionics, all the black boxes, the navigation equipment—they're always in demand,” he says, and none more so than air data and inertial reference units. The combination navigation and autoflight component “is a very expensive part,” says Avery, carrying a manufacturer's list price, sans airline discount, of about $1.5 million.

If AJ Walter were to sell such a component, and “we probably wouldn't,” says Avery, the price would be “north of a million dollars.” His company, and some others, would much prefer that customers enter into exchange agreements for such components, “because the item is so expensive, most [carriers] will hold minimum stock, if any.”

Avery contends exchange is good for AJ Walter and for the carrier. Customers could buy a hypothetical part that sells at a manufacturer's catalog list price of $100,000. Or, Avery could sell a used part for 60% of list, and realize $60,000 from the sale in what the executive terms “my one big hit.” That same $100,000 component, however, might be exchanged as many as four times per year, at $10,000 per pop. “Each time we manage a transaction,” it comes replete with a repair—a cost rechargeable to the customer. “We get smaller bites of the cherry, but we get a lot more bites.”

International Aircraft Associates (IAA), which specializes in powerplant parts, often advocates a similar portion-controlled approach when pitching customers. What IAA is after is core life-limited parts, with some life left. The operator can either sell the engine to IAA for part-out, or “work with someone like us and receive a higher return on [the] asset,” says President Mitch Weinberg. Instead of selling outright, the customer can exercise a bit of patience and enter into a deal where, over time, IAA refurbishes the parts and sells them, with the former engine owner reaping the rewards. Weinberg says such an arrangement can yield those former owners “at least 20% more” than a sale per se.

Weinberg says IAA has offered the option, dubbed “Managed Disassembly Consignment,” to customers on a trial basis. One- or two-engine trials have had a way of leading to more comprehensive pacts. As a result, some former operators ended up “giving you their whole fleet,” he says. The keys to making the arrangement work are “due-diligence . . . and trust.”

In a written statement, FL Technics says each company has its own strategy, but “We can sell outright, exchange, lease or rent—all options that would benefit both parties.”

It is against this creative transactional backdrop that parting out and pricing engage in ever-changing pas de deux, with competing companies in perpetual pursuit of in-demand parts. “That is why everyone who has all this money—whether it's equity or hedge—is going after the same assets, all those whole engines,” says Weinberg. The aim is to “get the 'gold' out of them.”

Just now 737 Next Generations are hot part-out plays. Avery says flightdeck displays and integrated drive generators (IDG) are both high-demand items. Although AJ Walter Aviation maintains large stocks of both, “If we had more we could find work for them.” He says manufacturer's list price for an IDG is in excess of $1 million. His company would offer them for $390,000-400,000.

Aside from Boeing 737NGs, Avery covets decade-old A320s, as well as A330s—asserting he “would probably give a kidney for a 777-200,” especially a late generation -200 or newer -300. Unrealistic? Not necessarily, not with the age of aircraft headed for disassembly decidedly younger now. “We're being offered 10-year-old narrowbodies on the market for part-out,” a situation Avery calls “shocking.”

Aircraft type demand is not uniform. It can be geographically dependant. FL Technics focuses on the Commonwealth of Independent States (CIS) and the Middle East, regions in which Boeing 737-300s, -400s and -500s still fly high, as do Bombardier CRJ100s and -200s. To that end, “The market for CFM56-3/5As is still very hot, as a lot of operators continue to fly classic Western fleets,” says Filip Stanisic, FL Technics' engine management department chief.

Literally and figuratively, high-pressure turbine (HPT) parts are hottest. Stanisic says FL Technics pegs the market in the CIS for CFM56-family powerplants at “roughly $250–300 million” annually, 5% of the global share. Across the MRO world, the focus is squarely on HPT parts.

Stanisic says HPT aftermarket blades are selling for $2,500-7,000 “depending on condition, technical specification [and] number of previous repairs.” HPT vanes vary more widely, with aftermarket prices ranging from $2,400-15,000, predicated on the same factors.

Life-limited parts (LLPs) also command a significant portion of the spend. “Pricing is dependent on the number of cycles remaining [on] the parts,” says Stanisic, as well as the “manufacturing standards” of the company that produced them. “Subject to the individual part number and available cycles, LLPs may cost anywhere from $15,000-300,000 each.”

In IAA's market, HPT and LLP components also are coveted. CFM56-5A and -5B core components are still sought after, as they are for the CFM56-7B. Also in demand are HPT parts for IAE's V2500-A5s, CF6-80C2s and even Rolls-Royce RB211-535s. Weinberg calls these “common engines [for which] everyone would love to have certain parts.”

While he declines to specify pricing, Weinberg says LLPs cost 85-95% of pro-rated list, or PRL. For example, if the catalog list price for a hypothetical life-limited engine component is $100,000, and it is limited to 30,000 cycles, divide $100,000 by 30,000. The result is $3.30 per cycle. Thus, if an LLP has 10,000 cycles remaining, the pro-rated list price would be $33,000. Such is the elemental math of parts pricing for powerplant LLPs.

The parameters of aftermarket arithmetic depends on the operator. While Weinberg says, “[While] many people do not want to overbuild an engine . . . there's a significant segment of the market that will always want to build them strong.” He says that segment comprises carriers with larger fleets—airlines that want to keep their engines on-wing 10-15 years, and wring a couple of more shop visits out of them. “They're going to the [original equipment manufacturer] and buying brand-new LLPs, and possibly brand-new HPT” parts says IAA's president.

Other operators assiduously seek out the aftermarket, willing to purchase half-life-remaining LLPs that they are going to have overhauled. They might then run them for the next 5-7 years. The cost of those overhauled LLPs, Weinberg says, is between 75-95% of pro-rated list. A low-pressure turbine (LPT) part ranges 55-65% of PRL, while an overhauled HPT first-stage blade “is 50-75% of the catalog price of the OEM.”

As for a part provider's return on investment (ROI), Avery says CFM56 and V2500 numbers “are very similar.” In very good condition one might cost $4 million. Typically, an engine shop would invest another million for tear down and refurbishment. Do that and “You'd probably get your money back in 9-12 months. That's an average,” he says.

The AJ Walter executive says a 737-700 airframe costs $5-7-million, depending on configuration. A company could easily spend another $250,000 parting it out, dismantling it and disposing of the leftover aluminum. Add to that yet another $1 million to refurbish the parts mined from the aircraft. Avery says ROI on such an airframe is about three years. The returns “aren't as quick,” as on engine parts.

AJ Walter Aviation and IAA see comparatively fresher aircraft and powerplants rolling in for part-out than was once the case. The dance partners are getting younger all the time. “We're looking at relatively new airplanes,” says Avery. “They haven't even gotten into their teens.” Such are the realities of gold mining circa 2013 in the commercial aviation industry. “You're looking at the 80/20 rule,” says Weinberg. “Twenty percent of the parts are worth 80% of the value.”